Greece Warns of Worse Economic Downturn

The Greek economy is set to shrink by more than expected this year, the government said on Wednesday, as it braced for nationwide strikes protesting its plans for bringing the country's budget deficit under control.

Greece, grappling with a ballooning deficit and a 300 billion euro ($407 billion) debt pile, told the European Union that 2010 gross domestic product (GDP) would "most likely" shrink by more than the 0.3 percent currently forecast.

It also said the drop may exceed an alternative, more pessimistic, scenario published in Greece's Stability and Growth Program in January envisaging a 0.8 percent contraction.

Economists and ratings agencies have warned that a sharper than expected slowdown in the economy is one of the biggest threats to Greece's commitment to cut its budget deficit to 2.8 percent of GDP by 2012 from close to 13 percent last year.

The finance ministry said it could not provide precise GDP estimates, citing planned revisions to data against which 2010 numbers will be calculated, but a finance ministry official said a new forecast should be ready by the end of April.

The official, who asked not to be named, said 4.8 billion euros in new savings measures unveiled last week had already been designed to address EU fears the economy would undershoot.

"I estimate the economy will contract by 2.8 percent," said Gikas Hardouvelis, Chief Economist at EFG Eurobank and professor of economics at the University of Piraeus.

"Consumption will decline about 5 percent after (austerity) measures which will curtail incomes in the public sector," he said, adding that the government's deficit goals should still be attainable given there was still room to cut spending in some areas to address any further revenue shortfall.

Putting a lid on fears over how low things might go, Finance Minister George Papaconstantinou said last week that he did not expect GDP to contract as much as the 2 percent seen in 2009.

The finance ministry said a 2009 base year revision on its own would knock 0.9 percent off GDP but also warned that the overall economic environment had worsened, particularly after it imposed cuts and tax hikes to contain the deficit.

Another key concern among economists is whether the government has the will and the support it needs to deliver on its budget commitments.

The ADEDY and GSEE unions, which between them represent half of Greece's 5-million-strong workforce, have called a nationwide strike for Thursday, leaving flights grounded, boats docked and ministries, tax offices, schools and hospitals shut.

In Athens, where tourist attractions such as the Acropolis are due to be shut, police said they were bracing for trouble after clashes with demonstrators last week.

About 1,500 riot police will be guarding the center of Athens with more units on standby if needed.

Recent opinion polls indicate overall support for the government, elected in October, has remained relatively steady but reveal deep divides over the fairness of VAT hikes, cuts in bonuses for civil servants and a pension freeze.

The government said it was ahead of schedule with plans to bring its deficit within EU limits and that there had been no slippage in commitments to rein in spending but warned stubbornly high yields on Greek government bonds posed a risk.

"The persistence of very high yields on government bonds will probably lead to a revision in the budgeted interest payments for the debt in 2010," the report said. "In this regard, additional expenditures in interest payments will be required."

The European Commission said on Wednesday it was still discussing with euro zone countries a possible mechanism to help Greece tackle its financial problems.